Slumbering legal sector wakes up with a surge in dealmaking

Over the past few years, the legal sector has been somewhat quiet on the M&A front, particularly in comparison to other similar sectors – such as professional services in general or wealth management– that have seen huge amounts of dealmaking.

Several factors have been cited as contributing to the general lull in legal sector M&A, ranging from a resurgence in demand for legal services causing owners to pause or avoid exit plans, the ongoing impact of COVID-19 and the recent economic uncertainty that the UK has experienced.

However, this period of restrained activity has potentially helped to create the conditions for a considerable uptick in dealmaking over the coming months and there have been signs already this year that M&A in the sector is beginning to accelerate, with industry observers suggesting that a range of factors could push the industry into a busy period of consolidation.

The lull

According to an analysis of figures from the Solicitors Regulation Authority (SRA) by law firm Hazlewoods, M&A in the sector had been on a steady decline for much of the past decade, from a high of 278 deals in 2011 to just 143 in 2019.

This trajectory was then further exacerbated by the chaos caused by the COVID-19 pandemic, which took a massive toll on dealmaking, with 107 deals recorded by the SRA in 2020, before activity fell to a new low of just 99 deals in 2011.

Hazlewoods Associate Partner Ian Johnson attributes these figures largely to the immediate impact of the pandemic, which caused acquisitive firms to pause M&A plans in order to focus on survival while prompting other owners to pause exit plans and wait for the economy to rebound.

However, Johnson also argues that the low dealmaking figures, particularly during 2021, were as much a result of the success many practices were seeing in the wake of the pandemic, particularly in booming sub-sectors such as corporate M&A and residential property.

Johnson commented: “Over the last two years, law firm partners simply haven’t wanted to sell as they watched the profits roll in. Business has been booming and a lot of partners have been enjoying the profit distributions.”

Other factors that have been cited as contributing to a slow dealmaking environment in the legal sector are the economic uncertainty that the UK has experienced throughout 2022 and 2023 and a lack of “market-moving” M&A activity in the sector over recent years by major firms.

Poised for a dealmaking boom?

As we approach the mid-point of 2023 there are signs that M&A activity is beginning to pick up in the sector, with a range of merger activity in the UK market, including a growing level of dealmaking among consolidators and private equity-backed firms.

This rising level of activity, in the wake of a period of quiet dealmaking, has led to forecasts that the sector could be set for geographical expansion and consolidation plays. Numerous other factors are also developing that could further serve to boost dealmaking activity over the coming months and years, potentially meaning that the industry could be set for a lengthy, sustained period of consolidation.

Hazlewoods, which provides advisory services to law firms, said earlier this year that the past 12 months had seen “a big increase in M&A related discussions” as companies begin to consider resuming dealmaking activity – both on the buy and sell side. According to the company, approximately two-thirds of law firms expect to see an increase in M&A.

What factors could drive dealmaking?

Fragmentation
As with industries such as wealth management – which, unlike the legal sector, has been undergoing a period of intense M&A activity for several years now with no signs of letting up – the legal industry in the UK is highly fragmented.

According to a report from Research And Markets, there were a total of 9,622 law firms across England and Wales. While this was down 2 per cent down from the total a year earlier – potentially pointing to an uptick in M&A activity – it is clear that fragmentation is still significant.

A 2022 report from industry publication the Legists has identified this fragmentation as one of the major challenges facing the industry, with smaller firms having to dedicate time to attracting new clients amid intense competition, often to the detriment of the services they are providing to existing clients.

The report stated: “This fragmentation has resulted in an over-saturation of the market with competition. This has led to a problem with service quality because there are not enough qualified lawyers available to do work for clients who require them.”

As challenges mount for smaller law firm owners, the option of exiting the business or an acquisition by a larger firm that can handle back office and administrative operations might become more attractive. This has helped to create an environment in which well-capitalised businesses with acquisitive appetite have ample opportunities to acquire smaller businesses through a scaled-up buy and build growth strategy.

Hazlewoods’ Ian Johnson commented that: “Consolidator firms looking to scale up or expand their geographic footprint through acquiring smaller firms will find there are a lot of opportunities to do so at the moment.”

If M&A activity in the sector is to undergo a genuine boom, then fragmentation will arguably be the key driving factor – as it has been for several years now in industries ranging from wealth management and language services to childcare and dental services. Recent M&A developments in the legal sector indicate that this is already proving to be the case.

Private equity investment ramps up
Across a range of industries, private equity has been a key factor behind rising M&A activity over the past couple of years, with PE investors sitting on huge levels of dry powder (unspent capital) in the wake of the COVID-19 pandemic and able to target an enormous range of acquisition opportunities.

Following a quiet period in the legal sector, the conditions appear to be perfect for a significant influx of private equity investment – with a high level of fragmentation and growing discussions around succession planning throughout the industry.


One private equity firm already taking a huge interest in the legal sector is Blixt, which has completed several acquisitions through its holding company Lawfront. The firm has targeted regional acquisitions, with deals for East Midlands practice Nelsons, North West-based Farleys and Essex-based FJG, and aims to take advantage of the industry’s fragmentation to create regional hubs through existing brands.

Once these regional hubs are established, Lawfront plans to grow acquisitively through bolt-on deals for smaller firms, with the ultimate aim of growing the group’s overall turnover from £40 million to £100 million.

Blixt Principal Rachel Reddy explained that fragmentation, combined with the range of issues facing many smaller law firms, have created an environment that is ripe for private equity-backed consolidation. She commented: “There are 9,500 law firms in the country and so many are one to two partner firms.”[i]

With conditions already being generally conducive to dealmaking, the strong performance of several legal industry sub sectors is attracting the attention of private equity investors looking to buy into high growth areas such as boutique commercial, family and employment law. Overall, there is strong growth in the wider sector, with a Research and Markets report valuing the industry at £43.9 billion at the end of 2022, an increase of 6.3 per cent on 2021.


[i]Stowe Family Law, a Leeds-based family law firm founded in 1982, received backing from PE firm Livingbridge in 2023, completing its first deal last year with the acquisition of London-based boutique family law practice Chapman Pieri.

Earlier this year, Stowe chairman Ken Fowlie discussed the firm’s ongoing M&A plans for 2023: "Following the successful integration of Chapman Pieri, the firm is working with its key stakeholders and being advised by Springboard Corporate Finance to identify more acquisition opportunities in 2023 with aligned specialist family law firms.”

Since then, the company has completed its second acquisition with a deal for family law practice Watson Thomas Solicitors. Announcing the deal, Ken Fowlie said that Stowe was aiming to become “the UK’s leading family law practice” amid growing national demand for family law services.

A wave of investments by private equity firms in legal sector buy-and-build strategies could, furthermore, precipitate a sustained period of dealmaking, with the bulk of private equity investors typically looking to exit their investments within five years. If consolidation is driven by private equity funding over the coming years, then this will create a situation in which several large consolidators may come to the market themselves five or so years from now.

Succession planning issues come to the fore
COVID-19 and a subsequent period of booming activity across numerous sub-sectors saw many firms pause their M&A activity and potentially delay exit strategies. This has exacerbated one of the major issues facing the legal industry: an ageing population of owners.

Again drawing a parallel with the wealth management industry, the highly-fragmented legal sector is home to a huge number of small firms (including many one-partner practices) that have owners approaching retirement age – the kind of situation that could prove conducive to a wave of dealmaking.

According to SRA figures from last year, more than one in five partners at UK law firms (22 per cent) are aged between 55 and 65, while 13 per cent of one-partner firms are operated by owners over the age of 65.

This could help to pave the way for an intense period of dealmaking for several reasons. Naturally, of course, owners selling their firms as a retirement plan. However, sales could also help to solve the issues that can often arise around succession planning and the diverging priorities of younger and older partners at some practices.

As Blixt’s Rachel Reddy explained: “Most operate in a partnership model which is so heavily dependent on those partners being willing to invest in the business. Younger partners might want to invest in technology, new offices or to grow the business, but generally older partners are more concerned with getting the cash out. These dynamics are really difficult to deal with.”

Amid this kind of tension, an acquisition by a well-capitalised firm – such as a private equity-backed consolidator – can enable younger partners to access the finances they require to invest in the future growth of the business, whilst also providing financial stability and a path towards an exit for older partners.

M&A can help to significantly simplify planning issues when it comes to succession. Many UK law firms operate under what is called a “monarch system”, in which one partner – typically a founder – is the firm’s lead generator and senior figure.

With so many owners and partners nearing retirement age, this kind of structure can create succession problems, with junior partners potentially earning more money under the structure and under less pressure to bring in work themselves – meaning they are less eager to take on a leading role once the “monarch” retires.

According to Andrew Roberts, a director at law merger advisory Ampersand Legal, this can make a sale a more attractive option to owners looking to retire. Roberts commented that younger lawyers aren’t "necessarily wanting to become equity partners”, which, as a result, means that "the next owners of law firms aren’t guaranteed to be there, meaning the only option may be to merge.”

Growing costs could drive deals
While perhaps not the most-exposed sector when it comes to recent economic headwinds such as inflation, the cost-of-living crisis and rising energy costs, law firms are still seeing costs rise and this, combined with other emerging challenges, could help drive an uptick in distressed and strategic M&A.

Regarding the increasing appetite for M&A in the sector, Hazlewoods writes: “The drivers behind this enthusiasm have shifted over the years, as the ever-increasing cost base for firms has created increasing stress on profitability, and M&A is seen by some as a way to counter this stress.”

As law firms seek to improve their profitability and grow in what remains a challenging environment, M&A deals could prove to be one of the only reliable avenues to sustained growth. Furthermore, with private equity interest in the sector high and set to increase further during 2023, companies with strong M&A strategies could find there are more opportunities to attract funding for acquisitive growth.

Distressed M&A could become prominent
Of course, while some well-capitalised and more recession-proof firms may be able to utilise M&A activity to strengthen their operations and navigate the prevailing economic headwinds, other companies will suffer more acutely and potentially become targets for distressed acquisitions.

There have already been signs that distress is on the rise in the industry, with the SRA reporting a spike in law firms reporting financial difficulties in autumn 2022. At the time, the SRA’s head of forensic investigation and intelligence Sean Hankin said: “We’ve really played a waiting game until recently. It’s not been until the last month or so that we’ve actually seen a number of firms that are reporting difficulties to us.”

“The concern is that these haven’t just been the smaller firms – it has been right across the board. We’ve seen some very large firms that have reported difficulties.”

Hankin cited a range of factors that were beginning to impact law firms, including the effects of COVID-19, government support loans and deferred tax bills from the pandemic, rising professional indemnity insurance (PPI) and reduced demand amid the cost of living crisis.

As financial difficulties increase, one key factor could prompt law firms to quickly seek a sale as soon as signs of distress begin to show: the heightened consequences of insolvency. More so than in other sectors, insolvency for law firm partners can have dire repercussions.

Zulon Begum of law firm CM Murray LLP explains: “Law firm partners could end up losing all the money they put into the business and potentially be liable for some of the debts of the firm. It could also go on their regulatory record and, if they are found to have acted improperly, they may even be disqualified from being a director or LLP member in the future.”

Faced with such risks, law firms that begin to experience financial distress may prove to be more open to an acquisition, potentially making them natural acquisition targets for consolidators willing to plough investment into helping turn a business around.

According to Hazlewoods’ Ian Johnson, growing economic uncertainty and an increase in M&A appetite following the post-COVID lull may prompt a growing openness to being acquired even among more successful firms. He commented: “As the economy slows and the boom for law firms ends, we expect to see more partners putting their firms up for sale. As dealmakers come back to the table, they are finding that owners of a lot of good-quality firms are now ready to listen to offers”.


Earlier this year, the Ince Group, a 150-year-old law firm that was once the largest listed legal firm in London, fell into administration amid increasing cash flow pressure and a protracted auditing process that saw the company miss four deadlines to file its financial accounts for the year to March 31 2022.

Quantuma was appointed as administrator to the firm, immediately closing a sale of the business and some of its assets to solicitors Axiom DWFM in a pre-pack administration.

Axiom DWFM founder and managing partner Pragnesh Modhwadia commented: “We have great confidence in the quality of the Ince & Co. business and the lawyers within it and are very excited that, like AxiomDWFM, the firm is built around differentiated areas of great specialism, market positioning and quality of service. When the opportunity came to acquire a business of the calibre of Ince & Co. we were eager to engage and are delighted that the Ince & Co team shared our enthusiasm.”

Ince Group CEO Donald Brown added: “This acquisition of the Ince businesses will give the firm, our team and our clients a simple and clear corporate and capital structure under professional, knowledgeable and robust ownership. We are underpinned by a group of immensely talented lawyers with deep expertise in our key sectors. After taking over the management of the PLC group, it quickly became apparent that we needed to address a series of poorly structured and executed transactions and expansions.”

Consolidator activity ramps up
As M&A activity begins to increase in the legal sector, one of the key drivers will be the activity of dedicated industry consolidators. This is a phenomenon that has arguably been the defining feature of the wealth management M&A boom, which has been led by consolidators such as Kingswood, Fairstone Financial Management, Perspective Financial Group and Mattioli Woods.

These firms, often backed by private equity investment, seek to take advantage of industry fragmentation and grow rapidly, primarily (or entirely) through acquisitions of smaller firms, building a national network of regional hubs, perhaps with a centralised back-office operation.

While the legal sector is yet to see the level of consolidation that has defined wealth management over recent years (wealth management consolidator Perspective has completed eight deals so far during 2023, with a further seven in its immediate pipeline for this year), there are already signs that dedicated consolidators are playing a major part in increasing M&A activity.


Knights is a legal services firm that listed in 2018, since which time it has completed 21 acquisitions, claiming to now be the UK’s largest commercial practice without an office in London. The company has emerged as one of the leading consolidators in the industry, with its most recent deals seeing it make a double swoop for firms in Newcastle and Carlisle.

The acquisitions of Newcastle-based Newcastle-based St James’ Square and Carlisle-headquartered Baines Wilson follow its January 2023 deal for Bristol-based Meade King and provide the firm with entry into two new strategic growth markets in the North of England.

Knights CEO David Beech commented: "Strong cultural fit with Knights is a key criteria in our M&A strategy, and both firms are well aligned with the St James' Square senior team already very well known to our Teesside team. In addition, both operate in key centres in their respective regions, providing significant organic growth opportunities through the recruitment of high-quality talent."



Backed by Shard Credit Partners, MAPD Ventures is a law industry consolidator that has seen rapid growth on the back of a highly-detailed acquisition strategy. Despite only being founded in 2019, the firm’s turnover had grown to £15.7 million by May 2022.

Under the firm’s acquisition strategy, it targets local law firms across the UK. Post-acquisition, targets retain their brand while the wider group aims to foster sharing of knowledge, ideas and best practice among companies.

In a recent announcement, the company said that it was continuing to “actively look for great businesses that share our focus”, adding that it has the “funding and an appetite to invest in aligned businesses within the legal sector via a nationwide acquisition strategy” and that the strong performance of its previous acquisitions meant it was “well placed to make further acquisitions.”

Could a major deal help to burst the dam?
Another possible development that could help to further drive dealmaking within the sector is growing activity among larger firms. So far, activity among major law firms has been relatively quiet since the COVID-19 pandemic, but there are signs that this could begin to change.

Last year, one major UK-related merger saw global firm Clyde & Co join forces with UK practice BLM in a £700 million deal. However, this was upstaged in May 2023 when UK firm Allen & Overy announced plans to merge with New York-based Shearman & Sterling in a deal worth around £2.7 billion, creating a practice with approximately 3,900 lawyers across 49 offices.

This merger, the first between a major US firm and a major UK firm since the merger of Clifford Chance & Roger Wells in 2000, could herald the start of more major deals in the legal industry, particularly as some giants in the professional services sector come under pressure to reshape their operations.

Last year, Big Four accountancy firm Ernst & Young announced that it would split its audit and advisory businesses. The decision came in the wake of the collapses of BHS and Carillion, which had raised concerns over their audits, creating industry pressure to address potential conflicts of interest and avoid future scandals around accounting.

This has led to suggestions that EY and the other Big Four firms – PwC, KPMG and Deloitte – could begin to make acquisitions in the legal space as they look to increase the revenue they bring in from the lucrative legal services market amid the potentially costly separation of audit and advisory services.

According to a report by Thomson Reuters and the University of Oxford’s Saïd Business School, EY may look to triple its number of UK and Ireland lawyers, while PwC may double its legal headcount.

CM Murray’s Zulon Begum commented: “The Big Four firms have made some small acquisitions: for example, Deloitte’s acquisition of Kemp Little. But there hasn’t been a significant ‘market-moving’ acquisition as yet. What would change the dynamic of consolidation in the legal market would be if a Big Four firm acquired a top 50 full-service law firm.”

The AI race
Another trend that could boost M&A in the sector is the increasing use of AI among law firms. Across the world, more and more law firms are utilising AI to automate tasks such as research, drafting contracts and writing client memos. This trend is accelerating, as firms seek to outstrip their rivals in their uptake of the new technology and to secure the best talent in the industry.

This is likely to lead to a considerable degree of merger activity as companies attempt to increase the rate at which they harness AI by acquiring innovative startups or poaching talent from other companies, as in DLA Piper’s recent move for 10 data scientists from smaller firm Faegre Drinker.

Another recent deal saw legal tech companies vLex and Fastcase merge in a transaction that created the new vLex Group. The merger was described as creating a library that is "the biggest legal data corpus ever assembled”, which would in turn help to speed up the creation of new legal AI tools. The library has over a billion legal documents from more than 100 countries, including regulations, news items, judicial opinions and more.

Fastcase CEO Ed Walters said that AI was “absolutely a motivator for the combination”, adding that the new group would license its dataset for other firms to use in creating their own language models and would develop its own products trained on the data.

While the coming years are likely to be dominated by M&A deals involving firms acquiring AI capabilities, the uptake of the technology in the sector could also lead to a scenario in which some firms are left behind by the rapid advances of others and become targets for more powerful counterparts to acquire, this driving dealmaking further.

Will the end of the “pay wars” free up M&A funds?
A major factor in the UK legal industry over the past few years has been the so-called “pay war”, which has seen surging salaries among lawyers amid issues including growing competition for talent from US law firms. However, increasing economic uncertainty has seen law firms take action to cut their cost base, leading to predictions that salaries will level out, or even decline.

According to the CEO of one law firm, a slowdown in the rate of salary increases has been good news for the wider sector - and could enable M&A activity to increase. In an interview with City A.M., Gately CEO Rod Waldie commented that the firm’s spending on salaries as a proportion of revenues fell from a high of 64.1 per cent in the first half of 2022, to 61.7 per cent by October 2022.

As these costs fall, companies will be able to dedicate more of their funds to M&A activity, with Waldie commenting that M&A was “a key part of our strategy” and revealing that it had £23 million to deploy on acquisitions after seeing a relatively significant reduction in the amount it was spending on salaries.

Conclusion

While the legal sector has been surprisingly quiet on the M&A front over recent years, an array of factors seem to be aligning that could lead to a boom in dealmaking. While we have, so far, mostly only seen early indications of this kind of development, the potential deal drivers that are brewing seem to point towards consolidation throughout the industry.

Furthermore, given the nature of some of these potential M&A tailwinds, such as rapidly developing tech, widespread fragmentation and growing private equity interest, it is likely that any period of strong dealmaking could last for an extended period of time.

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